Correlation Between Cathay TAIEX and Fuh Hwa

Can any of the company-specific risk be diversified away by investing in both Cathay TAIEX and Fuh Hwa at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Cathay TAIEX and Fuh Hwa into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Cathay TAIEX Daily and Fuh Hwa Daily, you can compare the effects of market volatilities on Cathay TAIEX and Fuh Hwa and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Cathay TAIEX with a short position of Fuh Hwa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay TAIEX and Fuh Hwa.

Diversification Opportunities for Cathay TAIEX and Fuh Hwa

0.45

Correlation Coefficient

Cathay TAIEX  Fuh Hwa

Very weak diversification

The 3 months correlation between Cathay and Fuh is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Cathay TAIEX Daily and Fuh Hwa Daily in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fuh Hwa Daily and Cathay TAIEX is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Cathay TAIEX Daily are associated (or correlated) with Fuh Hwa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fuh Hwa Daily has no effect on the direction of Cathay TAIEX i.e., Cathay TAIEX and Fuh Hwa go up and down completely randomly.

Pair Corralation between Cathay TAIEX and Fuh Hwa

Assuming the 90 days trading horizon Cathay TAIEX is expected to generate 4.53 times less return on investment than Fuh Hwa. But when comparing it to its historical volatility, Cathay TAIEX Daily is 2.87 times less risky than Fuh Hwa. It trades about 0.11 of its potential returns per unit of risk. Fuh Hwa Daily is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  1,214  in Fuh Hwa Daily on December 30, 2024 and sell it today you would earn a total of  398.00  from holding Fuh Hwa Daily or generate 32.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Cathay TAIEX Daily  vs.  Fuh Hwa Daily

Cathay TAIEX Daily

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay TAIEX Daily are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Cathay TAIEX may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Fuh Hwa Daily

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Fuh Hwa Daily are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Fuh Hwa sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cathay TAIEX and Fuh Hwa

The main advantage of trading using opposite Cathay TAIEX and Fuh Hwa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cathay TAIEX position performs unexpectedly, Fuh Hwa can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Fuh Hwa will offset losses from the drop in Fuh Hwa's long position.

The idea behind Cathay TAIEX Daily and Fuh Hwa Daily pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.